Bershidsky on Europe: Pfizer Interested in AstraZeneca

Despite an international agreement reached in Geneva on Thursday to disarm all illegal armed groups in Ukraine, rebels aided, apparently, by Russian military intelligence have not given up seized government buildings in the country's industrial southeast. Three people reportedly died in a shootout near the town of Slavyansk, the center of the pro-Russian rebellion. Ukraine has declared an "inactive phase" of its "anti-terrorist operation" against the rebels, which apparently pleased observers from the Organization for Security and Cooperation in Europe, empowered to watch the situation by the Geneva deal between the U.S., the EU, Russia and Ukraine. The operation, however, had been so spectacularly unsuccessful in its "active" phase that Ukraine hardly made a major concession by putting the brakes on it. Further diplomatic effort to defuse the conflict must center on getting both the Ukrainian government and Russia to compromise and start talking among themselves. Right now, the Ukrainians only expect more help from the West and Russia does not feel obliged to stand down.

London's Financial Times calculates that five nations of the eurozone periphery will have to pay more than $179 billion in interest alone this year, three times as much as the other 13 countries of the euro area. Debt servicing will cost Portugal, Ireland, Italy, Greece and Spain about 10 percent of their revenues, and these countries' burdens are still climbing. Portugal's interest bill this year exceeds its education budget and is almost equal to the health one. The current low borrowing costs, even for bailed-out countries, prompt them to issue more debt, but even at these rates the growing overhang makes these countries vulnerable to any new shocks. The European debt crisis is not over, it's just overshadowed by the tentative economic recovery.

The Sunday Times of London reports that Pfizer has made a tentative approach to the Anglo-Swedish pharma company AstraZeneca about a takeover. The deal would value AstraZeneca at $100 billion. If it takes place, it will be the biggest takeover of a U.K. company by a foreign one: Astra is the country's 10th biggest firm. Pfizer, however, is reportedly eager to do something meaningful with $70 billion in cash piled up at its foreign subsidiaries. Repatriating it as profit would saddle the U.S. company with a huge tax bill. Using the cash pile for a big acquisition would be a better way to provide value to shareholders. Neither company, however, is commenting on the report, and while the business logic is there for Pfizer, Astra may not see itself as a takeover target.

Barclays, one of the world's biggest commodity traders, is the latest major bank to slash its participation in this business. JPMorgan Chase, Morgan Stanley, Deutsche Bank, UBS and Royal Bank of Scotland previously made the same decision. The commodities markets have not been volatile enough in the last couple of years to provide high returns to speculators. The money banks can make from commodities trading does not justify the regulatory risks and the necessary allocation of capital. Barclays, for its part, is cutting all activities that do not generate returns above its cost of capital, which includes metals, agricultural and energy trading. Precious metals trading is likely to be merged with the bank's foreign exchange operations. Commodities will soon be the business of specialized companies that do not face the same constraints as banks. These specialists will stand to reap windfall profits as soon as volatility returns.

By the end of next year, EU regulations will require carmakers that their output emit an average of 130 grams of carbon dioxide per 100 kilometers. In order to continue making SUV's and luxury sedans, companies like Daimler, BMW and Volkswagen have to push small cars, some of them with electric engines. That is a big financial headache because the margins are tighter on compact cars. Daimler, in fact, has lost $4.6 billion in the 15 years it has been trying to make Smart two-seaters, and it has undershot its production target of 200,000 such vehicles a year by 46 percent. Now, Daimler expects to pull the project out of the financial pit by pairing the Smart with Renault's Twingo: They will share a platform and 70 percent of parts, and the same factory in Slovenia will make both cars. Other manufacturers are also betting on joint ventures: Toyota's Aygo and PSA's Citroen C1 and Peugeot 108 are made in the same Czech factory.The cost-cutting JVs mean many of the small cars will be essentially the same regardless of the marque. The only way automakers can actually make a profit selling these standardized little boxes is to offer customization, such as many bright colors and roof decorations.

To contact the writer of this article: Leonid Bershidsky at lbershidsky@bloomberg.net.

To contact the editor responsible for this article: Nisid Hajari at nhajari@bloomberg.net

Leonid Bershidsky is a Bloomberg View columnist. He is a Berlin-based writer, author of three novels and two nonfiction books.
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